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A non-serious thread about money


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#1 of 49 OFFLINE   MarkHastings

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Posted May 13 2006 - 07:01 AM

I had a debate (with the family) about this and wanted get other opinions...

Let's say you own a home that still has a decent sized mortgage (or were looking to buy a home) and you came across a large sum of money (either in an inheritance or by winning the lottery, etc.) - Now let's say this money is just over what you owe on the home - or if you were looking to buy, the money was just over what you'd need to buy the home without a mortgage.

For example, let's say you still owe $200K on your home and you win $250K - or let's say you want to buy a $300K home and you win $350K...

Now what would you rather do? Use the money to completely pay off the home (i.e. and no longer have a mortgage) or put the money in the bank and use it to pay off the mortgage every month (basically to gain interest on the money)?

Now, I realize a lot of people have other debts that they'd rather use the money for, but I'm just asking about the above two choices...What would you rather do? Obviously, putting it in the bank and collecting the interest sounds nice, but it also sounds nice to have your home COMPLETELY paid off and never have to worry about a mortgage payment.

Hmmm?

I guess, what I would do is, put the money in a separate bank account and let it collect the interest (provided the percentage was more than my mortgage) and then I'd use an automatic payment process to pay the mortgage every month so I wouldn't have to worry about writing a check every month.

What would you do?

#2 of 49 OFFLINE   Malcolm R

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Posted May 13 2006 - 07:12 AM

I would definitely keep the money and keep paying the monthly mortgage.

If you invest your money correctly, you can probably use the monthly interest/dividends to make the mortgage payments. Then when the house is paid off, you'll still have a good sum of money invested/banked.

If you use it to pay off your house, yeah, you have your house free and clear, but you also have no money either.
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#3 of 49 OFFLINE   MarkHastings

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Posted May 13 2006 - 07:17 AM

Quote:
you also have no money either
with the exception of the 'gained' monthly mortgage payment back in your pocket. That extra $1,000-$2,000 (or whatever) every month, could be nice.

#4 of 49 OFFLINE   mylan

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Posted May 13 2006 - 07:22 AM

Yes but without the nice mortgage interest deduction on your taxes. I agree, put it in some sort of interest bearing account and auto draft the payment, that would be one less worry, one less stamp or trip to the bank and a fair sum down the road. If only I had this problem!
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#5 of 49 OFFLINE   Malcolm R

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Posted May 13 2006 - 07:29 AM

Quote:
Originally Posted by MarkHastings
with the exception of the 'gained' monthly mortgage payment back in your pocket. That extra $1,000-$2,000 (or whatever) every month, could be nice.
Yeah, if you're just looking for extra spending money. But if you want to build up a nest egg...

Assuming your payment is $1,000/month, and the mortgage/winnings/misc money amount is $100,000. You would have to bank that $1,000 each and every month for over 8 years to even build up the principal amount (that would require a LOT of discpline, which most people don't have when it comes to saving money). Not to mention the interest earned over the 8-year build up wouldn't come close to the interest earned from starting with $100K.

It would only take a 1% return on your $100K to pay the $1,000/month mortgage payment. Even most bank CD's are around 3-5% these days, so even with conservative investing you would net an extra $3,000-$4,000/month which would be compounded every month thereafter (or you could use it to pay down your mortgage that much faster, without touching your principal).
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#6 of 49 OFFLINE   Malcolm R

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Posted May 13 2006 - 07:32 AM

Quote:
Originally Posted by mylan
Yes but without the nice mortgage interest deduction on your taxes. I agree, put it in some sort of interest bearing account and auto draft the payment, that would be one less worry, one less stamp or trip to the bank and a fair sum down the road.
Good point about the tax advantages, too.
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#7 of 49 OFFLINE   MarkHastings

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Posted May 13 2006 - 08:23 AM

Ah yes, forgot about the tax benefit. Posted Image

#8 of 49 OFFLINE   Brandon_T

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Posted May 13 2006 - 08:23 AM

I didn't think CD's were a monthly percent. That would mean you would be getting 36k a year, and I don't think thats the case. You pay off the mortgage. If its the house you were able to afford in the first place you pay off the mortgage and be smart with your money. Over the course of the span of a 125k mortgage you are paying well over 200k for that house. In the mean time if you actually pay 125k for it then start saving you would come out in the long run. This is a long time debate in my other forum which is real estate investing. Its all about cash flow and either way you have extra flow. The tax deduction on a 125-250k mortgage is pretty insignificant in the grand scheme of things. Of course YMMV

#9 of 49 OFFLINE   Keith Plucker

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Posted May 13 2006 - 08:34 AM

Well, as others have pointed out, it comes down to the interest you are paying on the mortgage vs the interest you would make on your lump sum investment. Of course the tax issues have to be considered as well.

However, when you are considering the tax deduction on your mortgage interest payment, don't forget the taxes incurred on what you earn on your investment.

The other problem will be risk. Correct me if I am wrong but to make investing the money worthwhile you will probably pick a diversified portfolio of instruments, most of which will not be FDIC insured. You face a substantial risk of loss should some of your investments head south. If you pay off your house, take your mortgage payment and use it to invest, you reduce your risk by spreading your investment out over time.

While you can come up with numbers to show either way would be the correct choice, I wouldn't be surprised to find that paying off your house and investing over time to be the better route.

-Keith
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#10 of 49 OFFLINE   Jeff Ulmer

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Posted May 13 2006 - 08:44 AM

If you are borrowing on the mortgage at a low enough rate, keeping the money solvent would be my choice. This would also depend on the income situation, and how close to retirement you were etc.

#11 of 49 OFFLINE   Jay Taylor

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Posted May 13 2006 - 09:26 AM

I’ve always liked the idea of paying off the cars and mortgage and living debt free rather than keeping a mortgage and investing the money. Although I keep a home equity line of credit for emergencies, it has a zero balance and I’ve been debt free for a year now.

Many of us are very familiar with what it feels like to be up to your neck in debt, but words can’t describe the feeling of being totally debt free. Even if there were many advantages to keeping a mortgage and investing the money I wouldn’t do it.

For years I’ve listened to various financial advisors debate this topic and I can understand why people have different beliefs on this subject. But I prefer many of Dave Ramsey’s ideas for living debt free:

http://www.daveramsey.com
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#12 of 49 OFFLINE   Scott Merryfield

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Posted May 13 2006 - 10:20 AM

We've used a financial planner for many years. She is a strong advocate of not having too much equity in your home -- instead using the extra funds for other investments. You want to have a balanced portfolio, and paying off your home could possibly balance your holdings too strongly into real estate. Also, as others have pointed out, a mortgage is about the only tax-deductible interest left, so you are not really paying 6% interest (or whatever your mortgage rate may be) after taxes.

Now, with auto loans, I always try to pay those off as quickly as possible, assuming they are not very low interest loans. We currently have no car payments, and we never carry over a balance on our credit cards. Posted Image

#13 of 49 OFFLINE   Steve_Tk

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Posted May 13 2006 - 10:35 AM

Did I miss if he told us how far into the mortgage he is?

#14 of 49 OFFLINE   Brandon_T

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Posted May 13 2006 - 11:00 AM

Here is a great calculator that helps answer the question for your indiviual expectations. The calculator has several variables and you can make it to just about any situation you like. Have fun. http://www.hughchou....ff_v_borrow.cgi

#15 of 49 OFFLINE   Jay Taylor

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Posted May 13 2006 - 11:07 AM

Quote:
It would only take a 1% return on your $100K to pay the $1,000/month mortgage payment. Even most bank CD's are around 3-5% these days, so even with conservative investing you would net an extra $3,000-$4,000/month which would be compounded every month thereafter (or you could use it to pay down your mortgage that much faster, without touching your principal).

Malcolm this is incredibly bad math. A bank may give you 1% a year on your savings, not 1% a month. That comes to about $83.33 a month, not $1,000.00 a month.

As Brandon mentioned a 3-5% $100,000.00 CD will pay you $3,000.00 - $5,000.00 a year, not every month. This comes to $250.00 - $416.67 per month.
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#16 of 49 OFFLINE   MarkHastings

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Posted May 13 2006 - 11:28 AM

Quote:
Did I miss if he told us how far into the mortgage he is?
If you were referring to me, the question was hypothetical...it was based on my brother who wanted to sell his condo (but still owed a good portion of the mortgage) - He works for Fed-Ex and got injured in the parking lot of one of the businesses he delivers to.

He was discussing the settlement with my dad and asked if it would be good to take the settlement money and pay off the condo. I thought it was a great idea (because he'd no longer have to worry about a payment), but my dad disagreed. My dad didn't come up with enough of a convincing argument against it, so I posed the question here.

Of course there's a lot of factors that will determine the decision. And I'm sure the price of the home is key as well, but in the generic sense, I was just wondering the pros and cons either way....

p.s. Lots of good arguments here Posted Image

#17 of 49 OFFLINE   Joseph DeMartino

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Posted May 13 2006 - 11:30 AM

Quote:
Ah yes, forgot about the tax benefit.

Well, you have to see if there will be any, first. I'm single, don't make a huge salary, and don't have much in the way of medical bills or charitable deductions. I've never benefitted from the mortgage interest deduction because my total itemized deductions have never exceeded the standard deduction. For me it would come down to doing the math and working out the opportunity costs of both options. When I refinanced my condo last year to pay off the credit cards and some home improvements I decided not to pay off the car loan, even though I had the equity to do it, because I was paying 4.25% on the car and more than that on the mortgage - and because the mortgage interest deduction is not a factor in my case.

Without actually running the numbers I suspect that I'd be better off investing the cash - unless it was some really huge amount (which takes us outside the parameters of the thread) in which case I'd probably pay off the mortgage just to have one less thing to think about. Tell you what, I'm about to go grocery shopping and will also pick up a lottery ticket. If I win I'll tell you what I plan to do after I check the numbers tomorrow morning. (Well, one obvious thing - buy a much nicer Mother's Day gift before heading over to the folks' place for Sunday dinner Posted Image)

Regards,

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#18 of 49 OFFLINE   Bruce Hedtke

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Posted May 13 2006 - 11:43 AM

"You know what I'd do? Two chicks at the same time, man."


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#19 of 49 OFFLINE   Philip Hamm

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Posted May 13 2006 - 02:06 PM

Put the money in an account where you can access your money and gain more interest than a CD or savings by diversifying the investment. These exist. In the long run it would be a better position.

It's nice to be out of debt, we all want to eventually pay off our homes and stuff, but it's better to have to have the money liquid in case of some unforseen emergency.

The concept to understand in economics is the "Future value of money". Google it, you should be able to use the look up charts. Spend all the money now and you get the current value of it. Keep it in wise investments and you get the future value. The money, invested wisely, not requiring high risk investments, can easily be worth much more than if you bought the house/condo by the end of the mortgage period.
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#20 of 49 OFFLINE   ChristopherG

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Posted May 13 2006 - 02:59 PM

Bruce,

I'm with you!
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